Post-Keynesian Stock-Flow Consistent Modelling

Transcription

1 Post-Keynesian Stock-Flow Consistent Modelling Antoine Godin Kingston University October 21st, 2015 Introductory workshop on heterodox economics 19th Conference of the Research Network Macroeconomics and Macroeconomic Policies (FMM) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

2 Outline 1. Introduction 2. Financial Imbalances 3. The PK-SFC approach 4. The SIMplest model 5. A model of transition A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

3 Motivation: why should you use PK-SFC modelling? Highights fundamental real-financial interactions Powerful didactical tool Strong empirical connection A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

4 Sectoral balances Y = C + I + G + X M 0 = (Y T C I ) + (T G) + (M X ) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

5 Sectoral balances Y = C + I + G + X M 0 = (Y T C I ) + (T G) + (M X ) Net saving position from sectors in an economy NLP HH + NLP FC + NLP NFC + NLP G + NLP ROW = 0 Net lending position are fundamental as they are the result of agents interactions and will determine the evolution of stocks. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

6 Net lending per sector, UK A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

7 Household income statement from 2012-Q4 to 2013-Q4 Flows 2013-Q4 Net savings ( net worth) Table : Household Flow of funds (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

8 Household income statement from 2012-Q4 to 2013-Q4 Flows 2013-Q4 Total income (all sources) 7,059 Net social contributions receivable 182 Tax -962 Gross disposable income 6,279 Net savings ( net worth) Table : Household Flow of funds (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

9 Household income statement from 2012-Q4 to 2013-Q4 Flows 2013-Q4 Total income (all sources) 7,059 Net social contributions receivable 182 Tax -962 Gross disposable income 6,279 Consumption -5,507 Gross savings 829 Net savings ( net worth) Table : Household Flow of funds (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

10 Household income statement from 2012-Q4 to 2013-Q4 Flows 2013-Q4 Total income (all sources) 7,059 Net social contributions receivable 182 Tax -962 Gross disposable income 6,279 Consumption -5,507 Gross savings 829 Consumption of fixed capital -407 Net capital transfers -4 Change in worth of stocks -189 Net savings ( net worth) Table : Household Flow of funds (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

11 Household income statement from 2012-Q4 to 2013-Q4 Flows 2013-Q4 Total income (all sources) 7,059 Net social contributions receivable 182 Tax -962 Gross disposable income 6,279 Consumption -5,507 Gross savings 829 Consumption of fixed capital -407 Net capital transfers -4 Change in worth of stocks -189 Net savings ( net worth) 229 Table : Household Flow of funds (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

12 Households financial statement 2012 Q4 and 2013-Q4 Category Balance 2012-Q Q4 Non Financial assets Non-financial assets Housing wealth Financial assets Currency and deposits Securities and derivatives Loans Shares and equities Insurance and pension Other Net worth Table : Household Balance Sheet (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

13 Households financial statement 2012 Q4 and 2013-Q4 Category Balance 2012-Q Q4 Non Financial assets Non-financial assets 29,625 Housing wealth Currency and deposits Securities and derivatives 7,046 1,537 Financial assets Loans -6,196 Shares and equities 4,310 Insurance and pension Other 5, Net worth 42,456 Table : Household Balance Sheet (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

14 Households financial statement 2012 Q4 and 2013-Q4 Category Balance 2012-Q Q4 Non Financial assets Non-financial assets 29,625 29,041 Housing wealth ,435 Currency and deposits Securities and derivatives 7,046 1,537 7,225 1,365 Financial assets Loans -6,196-6,152 Shares and equities 4,310 4,858 Insurance and pension Other 5, , Net worth 42,456 42,685 Table : Household Balance Sheet (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

15 Households financial statement 2012 Q4 and 2013-Q4 Category Balance 2012-Q Q4 Non Financial assets Non-financial assets 29,625 29, Housing wealth , Currency and deposits Securities and derivatives 7,046 1,537 7,225 1, Financial assets Loans -6,196-6, Shares and equities 4,310 4, Insurance and pension Other 5, , Net worth 42,456 42,685 Table : Household Balance Sheet (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

16 Households financial statement 2012 Q4 and 2013-Q4 Category Balance 2012-Q Q4 Non Financial assets Non-financial assets 29,625 29, Housing wealth , Currency and deposits Securities and derivatives 7,046 1,537 7,225 1, Financial assets Loans -6,196-6, Shares and equities 4,310 4, Insurance and pension Other 5, , Net worth 42,456 42, Table : Household Balance Sheet (EUR Billions), source: ECB Monthly Bulletin May 2014 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

17 Why are Balance sheets so important? A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

18 A transfer from Agent Aa to Agent Ab A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

19 Adding the clearing mechanism A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

20 Outline 1. Introduction 2. Financial Imbalances 3. The PK-SFC approach 4. The SIMplest model 5. A model of transition A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

21 Godley s seven unsustainable processes, Written in 1999 when everything was fine for the US economy. Clinton: There are no limits to the world we can create, together, in the century to come. 2. Calling for political intervention and expansionary fiscal policies: The view taken here, which is built into the Keynesian model later deployed, is that the government s fiscal operations, through their impact on disposable income and expenditure, play a crucial role in determining the level and growth rate of total demand and output. 3. Highlighting seven unsustainable processes: (1) the fall in private saving into ever deeper negative territory, (2) the rise in the flow of net lending to the private sector, (3) the rise in the growth rate of the real money stock, (4) the rise in asset prices at a rate that far exceeds the growth of profits (or of GDP), (5) the rise in the budget surplus, (6) the rise in the current account deficit, (7) the increase in the United States s net foreign indebtedness relative to GDP. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

22 Stock-flow norms (Turnovsky, 1977, p.3) and (Godley and Lavoie, 2007, p.13) There are intrinsic dynamics, that reflect the dynamic behaviour stemming from certain logical relationships which constrain the system; specifically the relationships between stocks and flows Standards: (private or public) debt to GDP, capacity utilisation, unemployment rate, etc... A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

23 Stock-flow norms (Turnovsky, 1977, p.3) and (Godley and Lavoie, 2007, p.13) There are intrinsic dynamics, that reflect the dynamic behaviour stemming from certain logical relationships which constrain the system; specifically the relationships between stocks and flows Standards: (private or public) debt to GDP, capacity utilisation, unemployment rate, etc... Adjusted fiscal ratio: θ = T Y is the average tax rate, then the fiscal ratio G θ is equal to Y when G = T, adjusted for inflation. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

24 Stock-flow norms (Turnovsky, 1977, p.3) and (Godley and Lavoie, 2007, p.13) There are intrinsic dynamics, that reflect the dynamic behaviour stemming from certain logical relationships which constrain the system; specifically the relationships between stocks and flows Standards: (private or public) debt to GDP, capacity utilisation, unemployment rate, etc... Adjusted fiscal ratio: θ = T Y is the average tax rate, then the fiscal ratio G θ is equal to Y when G = T, adjusted for inflation. Adjusted Trade Ratio: µ = M Y is the average propensity to import, then the trade ratio X µ is equal to GDP when X = M, adjusted for inflation. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

25 Stock-flow norms (Turnovsky, 1977, p.3) and (Godley and Lavoie, 2007, p.13) There are intrinsic dynamics, that reflect the dynamic behaviour stemming from certain logical relationships which constrain the system; specifically the relationships between stocks and flows Standards: (private or public) debt to GDP, capacity utilisation, unemployment rate, etc... Adjusted fiscal ratio: θ = T Y is the average tax rate, then the fiscal ratio G θ is equal to Y when G = T, adjusted for inflation. Adjusted Trade Ratio: µ = M Y is the average propensity to import, then the trade ratio X µ is equal to GDP when X = M, adjusted for inflation. Combined Fiscal and Trade Ratio: G+X θ+µ is equal to GDP when balanced budget and trade balance. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

26 Unsustainable processes (Godley, 1999) Adjusted Fiscal Ratio and GDP Adjusted Trade Ratio and GDP A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

27 Conclusion Given unchanged fiscal policy and accepting the consensus forecast for growth in the rest of the world, continued expansion of the U.S. economy requires that private expenditure continues to rise relative to income. [...] The growth in net lending to the private sector and the growth in the growth rate of the real money supply cannot continue for an extended period. (p. 5) It will become necessary both to relax the fiscal stance and to increase exports relative to imports [but] it will be difficult to get the timing right. (p. 9) He then simulates whatever fiscal expansion plus (effective) dollar devaluation is necessary to generate the growth of output assumed in the CBO projections (growth just enough to keep unemployment close to its present low level) and an improving balance of payments. Specifically, it was necessary to raise total general government outlays [...] in stages by about 16 percent - corresponding to about $400 billion per annum at current prices - compared with what the CBO is at present projecting. (p. 10) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

28 Ireland is no poster child for austerity (Kinsella, 2014) 1. Ireland is getting better, clean exit from EU/IMF bailout program. Poster Child for Austerity measures? 2. Maybe not so much... A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

29 General situation A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

30 Sectoral balances A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

31 Trade Flows A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

32 Conclusions Trade balance improved significantly by decreasing the propensity to import via austerity thanks to the pick up in export due to the world (non-eu) recovery Ireland s financial openness allowed for a massive change in portfolio allocation of the financial assets to occur between financial and non financial corporations without impacting the households Ireland s post bailout performance in terms of debt dynamics will hinge upon its ability to trade off its trade performance and tax rates (p. 24) Ireland is still not the poster child for austerity, but, against the odds, as it were, a lucky child. Given the simple fact that as a nation Ireland has been bankrupted three times in 50 years, Ireland s peaceful exit from its bailout programme is all the more remarkable. The post-bailout landscape is fraught with risks to the nascent recovery, but stable debt dynamics and the openness of the economy should be enough to keep Ireland from requiring another bailout in the medium term. (p. 25) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

33 Macro-modelling and the great recession From the Stockton Report on the Monetary Policy Committee s forecasting capability: Consider creating a forecast with an extended horizon beyond the current three-year period: a horizon of sufficient length to allow consideration of the development and likely unwinding of major economic and financial imbalances. Motivation is clear: The building up of financial imbalances contributed to the financial crisis and ensuing Great Recession If we d been looking further ahead than two years, we might have seen this coming A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

34 Typical DSGE models have little to say about financial balances Any wealth to income ratio can be supported as an equilibrium Any debt to GDP ratio can be supported as an equilibrium The net foreign asset to GDP ratio is typically brought to an arbitrary level by an ad hoc portfolio cost Mervyn King, Twenty Years of Inflation Targeting, The Stamp Memorial Lecture, 2012 The dominant new Keynesian model of monetary economics lacks an account of financial intermediation, so that money, credit and banks play no meaningful role. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

35 Of stocks and flows 1. Importance of balances both in flow and stock levels 2. A seemingly sound situation might hide imbalances building up and leading to unsustainable situation 3. Importance of financial side of economy and feedback from real and finance 4. Need for dynamic model showing path dependency A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

36 Outline 1. Introduction 2. Financial Imbalances 3. The PK-SFC approach 4. The SIMplest model 5. A model of transition A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

37 Where do the SFC models come from? 1. Morris A. Copeland: Social Accounting for Moneyflows (1949) 2. JamesTobin Backus et al. (1980): arguably first complete SFC (matrix approach to accounting + closure). Tobin (1982): Nobel lecture, in part a SFC Manifesto (1. Precision regarding time; 2. Tracking of stocks; 3. Several assets and rates of return; 4. Modeling of financial and monetary policy operations; 5. Walras s Law and adding up constraints. ) 3. Wynne Godley formalization and development, thanks to a more appropriate economic approach (money matters..., see Godley and Lavoie, 2007, among many others) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

38 Post-Keynesian SFC modeling Thanks to the rigorous accounting rules underlying the construction of the accounting matrices SFC models provide a complete, integrated, and coherent picture of the real and financial sides of an economic system which allows to address fundamental questions such as: What form does personal saving take? Where does any excess of sectoral income over expenditure actually go to? Which sector provides the counterparty to every transaction in assets? Where does the finance for investment come from? How are budget deficits financed? Avoid black boxes in describing stocks and flows dynamics, and real vs monetary variables. What are we talking about? 1. accounting part 2. behavioral equations A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

39 Accounting: the matrix approach Rules: consistency (stocks and flows, within and between) someone s asset is someone else s liability AND someone inflow is someone else s outflow quadruple entry system (Copeland, 1949) budget constraint for each individual sector and for the economy as a whole ( Walras law and adding up constraint Tobin 1982 or budget constraint or system-wide consistency requirement Godley and Lavoie 2007 ) 1. Aggregate balance sheet: starting stocks of the economy. 2. Transaction flows: all the flows of the economy. 3. Flows of funds: how all flows end up in new stocks. End of the current period s stock = starting stocks of the following period. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

40 Accounting part 1 THE INITIAL STOCKS: the aggregate balance sheet Tab.1 Aggregate Balance Sheets. A (+) sign before a variable denotes an asset while a (-) sign denotes a liability Households Firms Banks Gov. Tot Bank Deposits +CA -CA 0 Bank Loans -L +L 0 Capital +K +K Net worth Vh Vf Vr Vg V A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

41 Accounting part 2 CURRENT TRANSACTIONS: the transaction flows Tab. 2 Current Transactions: (+) sign denotes receipt, (-) sign denotes a payment Households Firms Banks Gov. Tot current capital 0 Consumption -C +C 0 Investment + K - K 0 Memo: Final Sales at market prices = px = C + I = W + P Wages +W -W 0 Interests on L rll t 1 +rll t 1 0 Interests on CA +rcca t 1 rcca t 1 0 Dividends +Ff -Ff 0 Totals SavH Fu - K SavB SavG SAV A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

42 Accounting part 3 THE FLOW OF FUNDS: from the flows to the end of the period s stocks Tab.3 Flow of Funds: (+) sign denotes sources of funds, (-) denotes uses of funds Households Firms Banks Gov. Tot Current Sav +Sav H +Fu SavB 0 +SAV Bank Deposits CA + CA 0 Bank Loans + L - L 0 Fixed K - K - K Total Net Worth SAVH Fu Vb 0 SAV MEMO: The net worth of a sector is increased by its current savings during the period, plus capital gains. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

43 The equations: 2 steps 1. The accounting identities All the identities and flows implied by the accounting e.g. for firms (F= total profit) F = +C + K + rc CA t 1 W rl L t 1 (1) Ff = F Fu (2) 2. The behavioral equations: economic theory comes into play The closure: through theory we try to find an equation for each variable not directly determined by the accounting making theoretical assumptions on the behavior of the sectors. Fu = ζf (3) C = α 1 YD + α 2 V 1 (4) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

44 Assets through time (Caverzasi and Godin, 2015) The darker the more papers oncluded the asset A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

45 Outline 1. Introduction 2. Financial Imbalances 3. The PK-SFC approach 4. The SIMplest model 5. A model of transition A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

46 The structure of the SIMplest model and the accounting Hypothesis 1. NO private money no banks no loans and thus no interest payment 2. Closed no import nor export no capital flows 3. Pure labour economy no K no intermediate costs 4. No supply constraint of any kind 5. No inventories 6. Quantity adjustment mechanism: S = D A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

47 Sectors 1. Households buy consumption goods and pay taxes get wages accumulate assets 2. Producers sell services or goods to households and govt pay wages 3. Government buy goods from firms get taxes Assets high powered money (cash) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

48 The Model part 1: matrices Transaction Flow Matrix Households Production Government Consumption C +C 0 Govt. expenditures +G G 0 [Output] [Y ] Wages +WB WB 0 Taxes T +T 0 Savings S h 0 S g 0 Change in money stock H + H A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

49 The Model part 1: matrices Transaction Flow Matrix Households Production Government Consumption C +C 0 Govt. expenditures +G G 0 [Output] [Y ] Wages +WB WB 0 Taxes T +T 0 Savings S h 0 S g 0 Change in money stock H + H Balance Sheet Households Production Government Σ Money +H H 0 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

50 The Model part 2: the behavioral equations Disposable income (5); Taxes (6); Consumption (7); GDP (8); employment (9) YD = W N S T (5) T = θ W N S (6) C = α 1 YD + α 2 H h 1 (7) Y = C s + G s (8) N = Y W (9) C s = C d (10) G s = G d (11) T s = T d (12) N s = N d (13) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

51 The Model part 2: accounting identities H s = H s H s 1 = G T (14) H h = H h H h 1 = YD C (15) The hidden equation Watertight accounting: Walrasian principle (n th equation implied by the remaining n-1) H s = H d (16) NB that is our redundant equation: when trying to compute a model, it is important to identify one and not include it in the computation, otherwise the model would be overdetermined. Remeber it can always be used to check if the model is correct (e.g. if H s H d we had a mistake) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

52 R Package PK-SFC Written in R Internal parser: you need to write (almost) only equations Numerical solver: Gauss-Seidel Algorithm (twisted) Direct Acyclical Graph (DAG) representation Tutorials and download: A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

53 Tutorials on A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

54 Keynesian multiplier Equations C d = α 1 YD + α 2 H 1 = α 1 YD (3.13) Y = C + G = α 1 Y (1 θ) + G Y G = 1 α 1 (1 θ) (3.14) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

55 Keynesian multiplier Equations C d = α 1 YD + α 2 H 1 = α 1 YD (3.13) Y = C + G = α 1 Y (1 θ) + G Y G = 1 α 1 (1 θ) (3.14) Short run vs. Long run (3.14) is the short run multiplier, depends on start-of-period stock values (i.e H 1 = 0) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

56 Keynesian multiplier Equations C d = α 1 YD + α 2 H 1 = α 1 YD (3.13) Y = C + G = α 1 Y (1 θ) + G Y G = 1 α 1 (1 θ) (3.14) Short run vs. Long run (3.14) is the short run multiplier, depends on start-of-period stock values (i.e H 1 = 0) Need to obtain the steady state to compute long-run multiplier A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

57 Keynesian multiplier Equations C d = α 1 YD + α 2 H 1 = α 1 YD (3.13) Y = C + G = α 1 Y (1 θ) + G Y G = 1 α 1 (1 θ) (3.14) Short run vs. Long run (3.14) is the short run multiplier, depends on start-of-period stock values (i.e H 1 = 0) Need to obtain the steady state to compute long-run multiplier Steady state: Y = G θ = = 100 A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

58 Simulation results A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

59 Adding expectations: model SIMEX Consumption depends on expected NOT on actual income. We discover the buffer stock YD = W N S T (17) T = θ W N S (18) C = α 1 YD e + α 2 H h 1 (19) Y = C s + G s (20) N = Y W (21) YD e = YD t 1 (22) Households can make a wrong estimate of their disposable income. Hence the quantity of money held represents the adjusting mechanism (i.e. buffer stock) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

60 DAG representation Cycle cycle in the graph, implying that GDP, taxes, disposable income and consumption are determined all together (and that they fully adapt to any shock applied to the economy). A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

61 Buffer stocks H s = H s H s 1 = G T (23) H h = H h H h 1 = YD C d (24) H d = H d H h 1 = YD e C d (25) Hence H h H d = YD YD e (26) SO: if realized income is above expected income, households will hold the difference in the form of larger than expected cash money balances. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

62 Playing with expectations YD e = YD( 1) YD e = YD Buffer stock In the case of repeated error on expectations, wealth will absorb the imbalance (consumption is too low with respect to income) until it is large enough to spur consumption. A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

63 Outline 1. Introduction 2. Financial Imbalances 3. The PK-SFC approach 4. The SIMplest model 5. A model of transition A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

64 Motivation: Inadequate assessment of technological change in macro theory (Dosi et al., 2005) Technological change as neutral : simply improving overall performance of the economic system (Castellacci, 2008) Schumpeter: boom and bust cycles are inherent to the rise of innovation (Schumpeter, 1934/1912, 1964/1939; Perez, 2010; Hanusch and Pyka, 2007). Technological change and finance Schumpeter: Credit as the monetary complement to innovation (Schumpeter, 1934/1912) Today: a more financialized economy (Brown et al., 2009; Perez, 2009; Fumagalli and Lucarelli, 2011). A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

65 Motivation II Instability and financial fragility The interaction between real and financial dynamics to understand both short term (Junglar) and long-term (Kondratieff) technological cycle Instability and financial fragility Embedding Minsky s Financial Instability Hypothesis in a more general framework linking financial dynamics to the different phases characterizing the emergence and exploitation of a new techno-economic paradigm (Minsky, 1986). A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

66 Our research line In order to analyze both the structural change process triggered by innovation and its nexus with finance we develop two aggregate models following a Schumpeterian perspective: Multi sectorial Post-Keynesian Stock Flow Consistent (PK-SFC) A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

67 Flow diagram A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

68 Structural change - real output Figure : blue - consumption, red - traditional, yellow - innovative A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

69 Financial instability - market capitalization Figure : blue - consumption, red - traditional, yellow - innovative A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

70 Results The model dynamics are driven by two fundamental processes The replacement of the old capital by a new, more productive capital (long term) Financial instability arising from the emergence of a new sector (short term) Financial instability is transmitted to the real sector via two behaviors The consumption decision by capitalists which is based on real wealth and total revenue The investment function where Tobin s q impacts firms decision to increase or not their production capacity Real economy affects financial dynamics via Gross and distributed profits Changes in nominal wealth A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

71 Transitions Technology driven Climate change Regulation driven Modeling framework showing: Endogenous cycles (Jackson and Victor, 2015) Explicit financial-real interactions (Caiani et al., 2014) Long-run composed of short-run interactions (Rozenberg et al., 2014; Bassi and Lang, 2015) Multi-sectorial, with contagion effects A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

72 Why should you use PK-SFC modelling? Importance of (im)balances both in flow and stock levels, and of stock-flow norms A seemingly sound situation might hide imbalances building up and leading to unsustainable situation Importance of financial side of economy and feedback from real and finance Need for dynamic model showing path dependency The SFC framework based on national accounts allows to spot these imbalances The PK-SFC approach offers demand-driven models integrating finance and real sides of the economy A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

73 Thank you! Comments and questions most welcome to A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

74 References I David Backus, William C. Brainard, Gary Smith, and James Tobin. A Model of U.S. Financial and Nonfinancial Economic Behavior. Journal of Money, Credit and Banking, 12(2): , May Federico Bassi and Dany Lang. Investment hysteresis and potential output: A post-keynesian kaleckian agent-based approach. Economic Modelling, J. R. Brown, S. M. Fazzari, and B. C. Petersen. Financing Innovation and Growth: Cash Flow, External Equity, and the 1990s R&D Boom. The Journal of Finance, 64(1): , Alessandro Caiani, Antoine Godin, and Stefano Lucarelli. Innovation and finance: a stock flow consistent analysis of great surges of development. Journal of Evolutionary Economics, 24(2): , October F. Castellacci. Innovation and the Competitiveness of Industries: Comparing the Mainstream and the Evolutionary Approaches. Technological Forecasting and Social Change, 75(7): , A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

75 References II Eugenio Caverzasi and Antoine Godin. Post-keynesian stock-flow-consistent modelling: a survey. Cambridge Journal of Economics, 39(1): , Morris A. Copeland. Social Accounting for Moneyflows. The Accounting Review, 24(3):pp , ISSN G. Dosi, G. Fagiolo, and A. Roventini. An Evolutionary Model of Endogenous Business Cycles. Computational Economics, 27(1):3 34, A. Fumagalli and S. Lucarelli. A Financialized Monetary of Production. International Journal of Political Economy, 40(1):48 64, W. Godley and M. Lavoie. Monetary Economics An Integrated Approach to Credit, Money, Income, Production and Wealth. Palgrave MacMillan, New York, Wynne Godley. Seven Unsustainable Processes: Medium-Term Prospects and Policies for the United States and the World. Strategic analysis, The Levy Economic Institute of Bard College, A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

76 References III H. Hanusch and A. Pyka. Elgar companion to Neo-Schumpeterian Economics. Elgar, Cheltenham., T Jackson and P Victor. Towards a stock-flow consistent ecological macroeconomics. In PASSAGE Working Paper 15/02. University of Surrey Guildford, Stephen Kinsella. Post-bailout ireland as the poster child for austerity. CESifo Forum, 15(2):20 25, H. P. Minsky. Stabilizing an unstable economy. Yale University Press, New Haven., C. Perez. The Double Bubble at the Turn of the Century: Technological Roots and Structural Implications. Cambridge Journal of Economics, 33-4(4): , C. Perez. Technological Revolutions and Techno-Economic Paradigms. Cambridge Journal of Economics, 34-1: , A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61

77 References IV Julie Rozenberg, Adrien Vogt-Schilb, and Stephane Hallegatte. Transition to clean capital, irreversible investment and stranded assets. World Bank Policy Research Working Paper, (6859), J. A. Schumpeter. The Theory of Economic Development. Harvard University Press, Cambridge, MA., 1934/1912. J. A. Schumpeter. Business Cycle. A Theoretical, Historical and Statistical Analysis of the Capitalist Process. Abridged Edn., McGraw Hill, New York., 1964/1939. James Tobin. Money and Finance in the Macroeconomic Process. Journal of Money, Credit and Banking, 14(2):pp , ISSN S Turnovsky. Macroeconomic Analysis and Stabilization Policy. Cambridge University Press, A. Godin (Kingston University) PK-SFC Modelling October 21st, / 61